Pneumahttp://pneuma.com
home of the Omniplastic blogFri, 08 Dec 2017 21:05:37 +0000en-UShourly1https://wordpress.org/?v=4.9.4Euphoric Breakouthttp://pneuma.com/2017/12/08/1140/
http://pneuma.com/2017/12/08/1140/#respondFri, 08 Dec 2017 21:04:46 +0000http://pneuma.com/?p=1140Euphoria What does euphoria look like, how does it feel? The most obvious example of euphoria these days is bitcoin. But to my eye, the stock market crossed the threshold of euphoria this fall. I predicted we’d get a pull-back in the fall, but instead, we accelerated up. My reasoning was based primarily on natural […]

What does euphoria look like, how does it feel?

But to my eye, the stock market crossed the threshold of euphoria this fall. I predicted we’d get a pull-back in the fall, but instead, we accelerated up.

My reasoning was based primarily on natural range extension on a very large time frame, in the SP 500.

To me, that was a VERY conspicuous level, and SHOULD have at least produced a pullback. We got there neatly in August, so were perfectly set up for the fall fall. Instead, without a pullback, we accelerated UP!

2017 was already bullish. Lots of pundits were predicting pullback, or worse. When we exploded up, those voices evaporated.

Suddenly instead, we got calls from Goldman Sachs of 3100 on “rational” enthusiasm, and 5000 if it got irrational.

I remember in the late 1990s, hearing calls for the Dow at 20,000…which it did get to, but 20 years later.

I think the SP 500 just got irrational when it broke above 2500. How far it can go like this, who knows? Will it crash? For sure. When?

Since we know this entire run was driven by central bank printing, since 2009, it still seems to me that a reversal of that policy would likely turn the tide. But so far, the pumps are producing, $2 trillion in 2017 of new money.

But, more on how historic, and awe inspiring this Trump breakout is.

Look at the Dow! The Trump run ALONE is as big as the entire wave from 2007 to 2014! It also appears to me to have exceeded a natural, rational level, since Sept 2017. It’s a breakout everywhere you look.

Look how the 2003-2009 wave ENGULFED the entire market value of the earlier range, around the 2000 bubble.

When you look at these increasing wave sizes, it’s tempting to envision a giant crash, when this one topples. What if it engulfs the former range, like last time?

Zooming in, just since 2009, the sheer velocity of the Trump wave exceeds anything since the Obama era Fed QE scheme started driving it. AND, on top of that, our local central bank has stopped printing money since 2014, although, globally, money creation continues.

So yes, Virginia, we are going parabolic. This is what euphoria feels like. The last gloomy guys hang their heads in shame, and clam up. Predictions percolate for levels we will only reach possibly after another crash and rebound.

BTW, will we get a giant down wave, a crash of 80% or something, as happened in 1929, and 2000 to the Nasdaq? It’s possible. But I think for the answer to what is most likely, we should consider Japan.

The argument for why this will crash and burn and fall 80% is that added value has been created by printing ever more money, to correct for each recession. Each time, a larger amount of money is needed to correct for the recession, since an increasing amount of it flows in to the stock market, where it is low velocity, and does not generate a lot of economic activity, gdp. That’s the cause of the increasing wave size in asset values.

All this new money is debt, and each bubble pops when a class of debt starts going bad. Loans pop like bubbles, and the money disappears. Deflationary bubble popping kicks in, and markets fall. Then at some arbitrary seeming point, the central banks step in, turn on the presses again, and start buying assets (bonds), and lowering interest rates, to encourage others to borrow money and buy other stuff, most of which turns out to be companies borrowing to buy back their own stock, reducing the float, and causing more updraft on valuations.

The doom argument is that, at some point, the money printing scheme will fail…perhaps because bitcoin has revolutionized banking or something. For some reason, everyone will suddenly see through the shame of fiat currencies, and turn up their noses at them (although they will still have to convert back to them to pay taxes.)

But what if we don’t have the crash to end all crashes. We get something like a healthy 50% pullback, which doesn’t even take us back to the range of 1996-2012. How could this happen?

Japan arguably hit a point similar to where we are now, decades ago. And they have prevented any severe economic depression by simply printing more money. They are something like 3x as indebted as US or Europe. Their central bank creates money and, for one thing, directly buys their stock market through ETFs, to the point of owning a large share of the whole market.

So, to my mind, it seems plausible that we could have another Fed buying caused up wave, after another crash, which might not go too deep.

When we look at a 100 year chart, not adjusted for inflation, the market has moved up in big spurts, which never revisited the earlier ranges.

The breakout out of the 1960-70s range (secular bear) is exactly correlated with the legal change in 1982, that allowed for corporate buybacks. That is, a lot of the buyers, in that epic run from 1982 to 2000, were the companies themselves.

Clearly, that happened in a higher interest rate environment than we’ve had since 2009. So it CAN happen in a higher interest rate environment. And we also know that interest rates can fall, even from here, and even from zero.

Here’s an in interesting 120 year annotated chart of the Dow, from this page

I’ve been primarily looking at the price action itself…how big the waves tend to be, historically, how long the calm phases last. But of course, it’s interesting to overlay a chart of all the exogenous events, and seemingly relevant news of the day.

Of course it’s true that some event like WW3 could Trump Trump, and central banks, for a while, possibly years.

Trump

Back to the historic nature of the Trump breakout. I’m sure a lot of records are being broken. One is, I think this is the most one-time framing (higher lows) monthly up candles in a row in history. 13!

]]>http://pneuma.com/2017/12/08/1140/feed/0Toppy much, Euro?http://pneuma.com/2017/09/01/toppy-much-euro/
http://pneuma.com/2017/09/01/toppy-much-euro/#respondFri, 01 Sep 2017 21:13:50 +0000http://pneuma.com/?p=1123The Euro may have topped Let’s look at pictures first, and tell stories later. Pictures Looking at the days of this week, we made a nice turn, off a very strong reference point, a gap left in the 2014 washout, which happened when the Fed stopped US QE. That was a very nice topping tail […]

Pictures

Looking at the days of this week, we made a nice turn, off a very strong reference point, a gap left in the 2014 washout, which happened when the Fed stopped US QE.

That was a very nice topping tail through the gap. But on an hourly chart, we got an even stronger rejection tail, as confirmation, a few days later.

Looking at weekly chart, we can see more in context, the historical levels this is auctioning.

We pushed above the 2015-17, so now it’s playing older ranges.

You can see how the 2015 top just barely touched the bottom of the decade old range, and strongly rejected. In 2016 it tried again, and couldn’t even get back up there. But now, in 2017, it has pushed a little in.

The rule is, if it gets above 15% of that range, and holds, it’s likely to go all the way through. But it appears to me, just eyeballing it, like it went around 15% in, and promptly rejected.

If it did indeed climb into that range, the 80% rule would take it all the way through, to $125, which would be a screaming short.

But there is a good argument it won’t get that far. For one thing, this is the first touch of that 2010 low candle, and that’s the bottom of a MUCH bigger range than the 2005 range. And look what happened in 2015 when we just touched, like a feather, the bottom of the 2005 range.

Those tails can be VERY strong resistance, especially the first touch.

Stories

When we think about fundamentals, the biggest move in recent times was down. That was in 2014, at the time when the US stopped printing money. So the US money supply began contracting, relative to the Euro, which was still printing.

If the Fed follows through with unloading their bonds on the market in Sept. that would be a move of a similar type, and scale. That would likely start the Euro down, and the dollar up. If then in Dec the ECB followed through, and tapered QE, and the Fed accelerated bond sales, the move would probably pick up steam, and the down move that started in 2008 would continue, probably to parity, or 97 cents.

If, on the other hand, the Fed postpones in Sept, but follows through in Dec. we might get go sideways,
until then, or drift up to that $125 level.

Which is more likely? To me, it seems like, with stocks at all-time highs, there is a good chance they follow through in Sept.

On the other hand, if North Korea does something really, really stupid (and they’re just the guys to do it!), and the market crashes before the Sept meeting, then, of course, probably the Fed postpones.

The Dollar chart

Pace

In my prediction last June, I guessed the dollar would go further down, and take longer

Because I thought a turn like this would be too obvious. This is what it did last time, in 2015 AND 2016…barely broke out of range, left and obvious bottoming tail, and sailed up.

Will history repeat AGAIN? That would be so obvious of you, history. I’ve come to expect more surprises.

And the dollar, like the Euro, is just touching on a HUGE decade long range below…the inverse of the Euro chart.

First, in 2015, it touched the first top of that range it could find, which was the 2005 top. In 2016, it pushed to the next reference point, which was a 2004 top.

Now it’s back for a 3rd try. It’s pushed slightly lower, and touched those shoulder tops from 2005.

Same story as with the Euro, it can get 15% in to that range, but if it digs any further, 80% of the time, it would go all the way through, which would take it to 87 cents….which would probably correspond to 1.25 in the Euro.

Deeper history

Just for fun, let’s rethink the earlier moves.

The first huge move down in the dollar, and up in the Euro, started from 2002 ish. That was probably mostly caused by the US easy money policy, that was the solution to the Dot Com crash, and set up the house bubble.

So money was created in the US by people taking loans to buy houses, from about 2002-2008. In the chart, it looks like the shit hit the fan in June of 2008 (an acceleration of mortgages going belly up.)

Without googling dates, in the chart, it looks like the use started QE in March of 2009, and maybe was announced in November, right after the election.

So then money began to be printed just to replace the disappearing money of defaults, just to keep the dollar from sudden dramatic appreciation.

When they finally laid off, the 2008 up move completed in 2014.

It also appears, btw, that there was a huge wave of house buying, in the last gasp years of the bubble, from March 2006- March 2008.

At least that’s what I would guess caused these moves. Although these guesses are very US centric.

I’ll have to look it up, and see if my guesses were right.

Predictions

If that was a large time frame top in the Euro,here’s my hypothesis 1.

The idea of the down force, is the Fed and ECB action.

The up force would be Trump tax cuts (that’s how I guess he would try to further weaken the dollar, by strengthening the business climate, and thus economy, and thus loosening conditions.)

If tax cuts go through, the news might propel that one wave higher, to 1.25 in the Euro. That would be hypo 2.

]]>http://pneuma.com/2017/09/01/toppy-much-euro/feed/0$ € updatehttp://pneuma.com/2017/08/27/e-update/
http://pneuma.com/2017/08/27/e-update/#respondSun, 27 Aug 2017 16:00:31 +0000http://pneuma.com/?p=1117Dollar Euro update Technicals first, then fundamental comments After Jackson Hole, the dollar continues to follow the trajectory I outlined a couple of months ago. The Euro is now well within my target zone for starting the short. My prediction was that it would top out around $1.20. But that is very close, whereas my […]

Technicals first, then fundamental comments

My prediction was that it would top out around $1.20. But that is very close, whereas my dollar prediction has a little more room on the downside.

But zooming out on the Euro, technically, the main point about the turning point is, the expectation is for the whole upper distribution to resist…the price range that lasted from 2003-2014….VERY strong ceiling.

So anywhere in that grey box is fair game for a top.

In fact, since the Euro broke firmly above $1.18, we are replaying the 2005 range.Once price gets in an old range, it’s likely to retrace it.

If so, that takes it to $1.25 ish, which would probably sync it up with my dollar bottoming chart.

You can see how price stuck to the bottom of that range ever since the 2014 fall. Typical range behavior.

Fundamentals

A few months back, I puzzled about the dollar fall, as the Fed was tightening, while the ECB was till printing money.

The Fed puzzled over this too. They didn’t understand why the economy was “loosening” while they were tightening.

Because my brain is foggy and sticky sometimes, it took a while for it to sink in for me what this means.

Basically, it means that, the creation of money in the US through loans being granted, accelerated through 2017, even though the Fed was raising the benchmark rate (all the way up to 1%, wow!)

This still basically gives us the same message that all my mental gyrations concluded: the US economy is much stronger than Europe. And that people and business really have so far believed in Trump as the business friendly president.

The Future

I have come to believe that what the Fed does with interest rates is nearly irrelevant, compared to their idea to unload $trillions in bonds on the open market.

If they follow through with this, it will do WAY more to raise effective interest rates, than their old fashioned style manipulation.

And the fact that the US economy is still loosening suggests the likelihood they will follow through is very high.

If so, they will probably begin this process before the ECB even stops printing money, let alone disgorging their balance sheet.

I think this will produce a whiplash effect. Suddenly new loans will grind to a trickle, defaults will commence, the dollar supply will shrink, especially relative to the Euro, and the 2017 move will reverse.

]]>http://pneuma.com/2017/08/27/e-update/feed/0Topping Tailhttp://pneuma.com/2017/08/09/topping-tail/
http://pneuma.com/2017/08/09/topping-tail/#respondWed, 09 Aug 2017 05:46:42 +0000http://pneuma.com/?p=1101A Good Top In my short trading career, I haven’t seen too many good tops. We had one today. That break above the previous all time high at $2480, then selling right back through that level…good top. Expectation would be at minimum to retrace through that top range, which is only down to $2460. When […]

That break above the previous all time high at $2480, then selling
right back through that level…good top. Expectation would be at
minimum to retrace through that top range, which is only down to $2460.

When you zoom out, you can see how we’ve stepped up, through
a series of ranges, since Trump. Each of those is a target. If this is
a bigger time frame top, and we retrace some of the Trump move,
we’d expect to walk down those steps, like a slinky.

A third zoom out gives us the huge support level, around $2036.

Other clues, to name just a few.

Dow had been on a historic run of all time highs, while the small
cap Russel had failed to make any new highs. The Dow was leading,
which I don’t think has ever happened before, to that extent.

The Dow made the same reversal. The Russel was falling.
The Nasdaq made a perfectly technical
turn, having exactly filled a gap down from it’s last all time high.

The internals were anemic (as they have been, increasingly, on each
successive all time high.)

We are in August, climbing to all time highs, when seasonally, we are
usually flat to weak. We are way over due for at least some kind of
correction.

There is the larger headwind of the promised accelerating Fed tightening.

None of this gives a clue about how big the pull back might be.
The tradition for quite a while has been “buy all pullbacks.)

We’ll see how things act, as the slinky hits each of those successive
ranges/steps.

8-9-17 update

Pretty perfect opposing tails.

Taken together, the two days
are like a big doji.

I still have the sense it’s running
out of steam…each rally is
smaller.

But that 2500 # is a psychological
magnet. And the Nasdaq came
a tick away from 6000.

Update, day 3

And…there’s the delayed follow through.

I don’t think I’ve ever seen negative 71k selling ES futures.

This is not likely to bounce easily. If it does, I’d say “short pops.”

This is not investment advise, just my habitual market narration.
Gloom can easily change to bloom, especially depending on your
time horizon. But that is actual selling, imo.

I told you, good tops are hard to come by these days. That one
wasn’t perfect, but better than we’ve had for a long time.

Review

I sent a message to a friend within minutes of the top, just
so I’d have a record of calling it.

——– Message ——–

Subject:

blow off top

Date:

Tue, 8 Aug 2017 10:37:28 -0700

From:

Kelly Evans <Kelly@xxx.com>

To:

xxx

markets might be topping here on a bigger time frame...
let's see how the day ends.

I’ll give some details about why I was seeing that.

SP500

I put a small blue circle on the SP500 futures chart to
show where I made the call.

As you can see, we had a breakout above the previous
all time high, and then it came back through that level
pretty quickly…that was one of many clues.

Internals

Next, a snap shot of the internals. I put a small blue
circle on how the NYSE tick plunged right at that moment.
The up vs down volume ($ADD) of the market went red.

The market has made new tops on weaker and weaker
internals, but up until now, those tops held, so it was
several things in context.

Nasdaq

I was even more focused on the Nasdaq that day.
See how it perfectly filled the gap from a few days
earlier?

Gap rules are, gaps are likely to be filled. And the
way they are likely to be filled, first price will often
trade only halfway through them. Later, it goes all
the way through. And then, later, price should go
through the gap in the other direction.

In the NQ, you can see that price sliced through
that gap days ago, on that big red washout, in the
down direction. But that gap wasn’t finished,
until it traded up through it from below.

The fact that it perfectly filled that gap from below,
then dropped, meant that, technically, we could
be topping…there was no technical reason any more
to revisit these highs.

Dow

The Dow had been in the news lately, for making
a series of new highs, 13 in a row I think, while
none of the other indices were. I think it was the
second most all time highs in history for the Dow,
and the only time it ever diverged from the SP500
like that.

Here’s the picture of that Dow that day.

The blue circle, at the moment I sent the email,
just punched back in to the range of the day before.
Plus, the way it popped above it that day was a
bigger wave, at the top, after it climbed on a
series of days with no waves.

RUT

The small caps normally lead, and are a good
indicator to watch for clues about what the large
cap indices may do next.

What was the Russel index doing at the time?
It was nowhere near it’s all time highs.

]]>http://pneuma.com/2017/08/09/topping-tail/feed/0Tectonic Currencieshttp://pneuma.com/2017/08/03/tectonic-currencies/
http://pneuma.com/2017/08/03/tectonic-currencies/#respondThu, 03 Aug 2017 17:07:12 +0000http://pneuma.com/?p=1076Dollar Euro update Using the dollar as an example, this discussion details how auctions trade in ranges, and how they react to historical levels. It also continues the tradition of predicting future price action. Preface I hope even non-traders could study these charts, with interest. I’ve tried to make my discussion clear and concise, so […]

The most surprising thing here (surprises are always the most interesting thing), to me, is that the Euro has climbed as far as it has, while I still have the prediction of the dollar falling further.

One thing I didn’t draw on the dollar chart was the tail from 2016. I did draw a bounce there, at almost exactly 92, but ultimately I predicted it would fall further, but not a lot further. I’ll add that level with a purple line now.

Note the level just above that, at about 92.5, which I’d originally marked as “2005 top”, was a secure low in 2015. (A “secure low” is a place where price bounced violently in the past.) When that level was retested in 2016, it was slightly exceeded, then caused a massive bounce.

Both times, price moved all the way back through the range, after that type of bottom….huge moves in the dollar.

Historical ranges

The reason I labeled that level 2005 top was to emphasize how price acts towards historical levels, even levels 10 years old, like this one. If we zoom out, we see that the tip of the 2015 tail rejected from a 2005 top. They are like a mirror image of each other (the bottom tail, and the former topping tail), and this is common on all time frames.

As we can see, when price first comes down, and touches a historical top, it’s very common to react swiftly, and bounce violently. This happened in 2015.

(In volume profile, or market profile, this is a “low volume node.” A place where very little volume traded. If you made a graph of music, this would be like a silent place.)

In 2016, we got the second touch of that 2003-2006 upper range, and it dug slightly deeper, to find the next top, which was from 2004

Now we are tapping this area for the 3rd time, so the expectation is to dig deeper. But, we still have a decade of tops in this area.

The next set of tops down are the ones I labeled 2006 shoulders, which will probably provide some support. But they are not as strong a reference as a former top (an inverse tail.) That’s why I labeled the 2009 top as a strong support reference.

Value areas

Another way of framing this is as the 80% rule. Which states: when returning to former ranges, price is likely to reject (at first). But if it pushes in to the former range, and holds inside the value area, then it’s likely to retrace that entire range.

This is what we have seen since 2015, the creation of a range, going on 3 years now, price zigging and zagging back through that area, establishing value.

The “value area” of a range is the middle 70%. Price can move in to a range up to 15%, without getting in to the value area.

So, knowing all that, we can redraw this historical chart in terms of ranges and their value areas.

Some charting programs could make a nice neat market profile of these ranges, and give us the value areas, but we can do it on the trusty calculator of a phone or in our brain.

Isn’t that funny, how the 03-15 value area high also happens to be exactly at the 2009 peak, where I predicted a turning point.

This is not by accident. All of this thinking becomes routine, and often unstated. You can visually see how ranges and value areas work, without drawing it out in detail like this.

But if you are taking a significant position, it can help to have a plan like this drawn out as a reference.

I remember someone remarking that the dollar might fall to 80. 80 is almost the midpoint of the range from 03-15. It would be called the “point of control.” If we charted the volume traded for the 12 year range, the highest amount would probably be at about 80.

But as we know, from the range discussion, if the dollar gets in to the value area of this lower range, it’s likely to fall all the way to the other side. It might bounce at 80, but that probably wouldn’t be the bottom.

So that 03-15 value area high line, where I’m predicting a bounce, is an important level.

Range extension

The converse of the 80% rule is how prices move in a discovery process, when it moves OUT of a range.

If price moves out of a range (and the 03-15 range is a HUGE one….meaning price is extremely compressed, and likely to push extremely far when it moves out of that range), if it holds more than 10% out of that former range, it’s likely to double the range.

Easy peasy, duplicating our ranges.

Funny, again, isn’t it? This takes us right back to the 2000 highs, giving us a nice neat 20 year range.

So if the 03-15 range top holds, as I predict, the up move could go a LONG way! From about 90 to 114-116. These are just numbers, but that is a face ripping move for anyone with a position.

This would probably equate to the Euro falling to parity and below. It would probably play out over a few years.

Fundamentals

]]>http://pneuma.com/2017/08/03/tectonic-currencies/feed/0Annual $ predictionhttp://pneuma.com/2017/07/18/annualcurrencyprediction/
http://pneuma.com/2017/07/18/annualcurrencyprediction/#respondTue, 18 Jul 2017 20:10:09 +0000http://pneuma.com/?p=1065Dollar trade set ups Here’s my annual, summer currency trade prediction. The currency trade I see setting up is in the EUR/USD, I see this as playing out over the course of about a year, if it works. Recap Last year about this time, I saw and posted the USD/JPY trade, which worked like a […]

]]>http://pneuma.com/2017/07/18/annualcurrencyprediction/feed/0Crypto-parabolashttp://pneuma.com/2017/07/16/cryptoparabolas/
http://pneuma.com/2017/07/16/cryptoparabolas/#respondSun, 16 Jul 2017 16:41:31 +0000http://pneuma.com/?p=1053Bitcoin and it’s crytpo-cousins Parabolic Price action Bitcoin and the like got interesting last spring. Like many others, I’m sure, I noted that the charts looked “parabolic.” That is, vertical price moves look like the front side of a shape that completes when price falls all the way back down to where it started. The […]

Parabolic Price action

Bitcoin and the like got interesting last spring. Like many others, I’m sure, I noted that the charts looked “parabolic.” That is, vertical price moves look like the front side of a shape that completes when price falls all the way back down to where it started.

The big question, of course, is if Bitcoin and friends will become currencies of major use, or if this is a flash in the pan. My guess had been the latter, for a few simple reasons I’ve stated for years, and will note below. But of course, I could be wrong about that, or anything.

I have some Facebook friends who were involved with bitcoin and other cryto-currencies since their inception. So, for one thing, they probably got suddenly dramatically wealthier a few months back. And for another thing, I saw the occasional post, breathlessly quoting pundits out-bidding each other, for the ultimate value of a bitcoin. Would it top at $10k, $100k…nay, $1million !

I saw articles poo-pooing the comparison with the Tulip bubble, and lauding the inherent usefulness of block-chain based digital currencies (triple entry accounting.)

Nevertheless, several of the hallmarks for a pop and flop were in place. Aside from the price action, when I heard about funds opening to allow people to invest their IRA in Bitcoin, I spied red flags.

Fib Test

Last week (June 14) I sent an email friends, noting the rapid peeling of price. I’ll just cut and paste those here, since they’re still relevant a few days later.

June 14

This could be the pullback in this second wave (a buying opportunity) or a parabolic collapse.

The question now is, is Bitcoin here to stay, and get more useful, and so more valuable? Or is it a pop and flop, a Tulip thing?

The buy point on this pullback should be either a 50% or 61.8% retracement of the upwave.

It’s frustrating to not have it on my trading platform, so I could chart it. But we can McGyver those.

It’s also frustrating that it’s not easy to buy through something like a normal broker. I thought it was going to become a currency pair, BTC/USD. But I don’t see it yet.

Anyway, I can mimic it with a made-up chart, so that we can see the buy levels would be $1585, or $1256.

But if it gets all the way back there in the next couple of weeks, this chart looks pretty parabolic. It would be better if it got there by slowly drifting down over at least a few months.

In any case, we can see from an all time chart, that let me draw in a couple of levels, that there is really no support at $1585. At $1282, we do have a little support, from a Feb 2017 top, so that supports the 61.8% fib.

The stronger support is down at about $1150. If the $1256 level was going to hold, it would be nice to see it plunge down to almost exactly $1150, and bounce right back, violently, on the same day, or at least the same week.

If it holds below that level, I’d say the world was telling us something important about bitcoin and crypto currencies, and it’s probably going back down to $200 or $300, and then flatten out there.

If one was to buy there, in case bitcoin is going to revolutionize the world, and it goes to $10k, $100k! I would buy at the $1250ish area, and take profits along the way if it goes up.

One prudent place to take profit would be half of the down move, so $2000ish. Then more at all time highs, at $3000. If it holds above there, one would have to assess, and make guesses.

Bitcoin fundamentals

Regarding bitcoin fundamentals, I may be a simpleton. But it seems to me like the only chart that matters is actual transactions.

This chart isn’t even close to the explosive growth of the speculation price on bitcoins.

And I don’t know if speculative purchases of bitcoin are included in this chart. What we really want to know is, how quickly is the use of bitcoin growing for buying actual things?

When are you going to accept bitcoin for your product? When can I use it on Amazon?

my guess

I think the chance of bitcoin becoming a major world currency is remote. I can imagine so many forces against it.

1. anyone can make a new blockchain or digital currency, and they do, and are!

2. if we are going to end up using something like bitcoin instead of dollars, Amazon or Google would be in a much better position to launch it. They could probably guarantee transactions in dollars in order to support growth.

3. if not Amazon or Google, or in addition to, I would think governments and central banks will issue something related

4. if central banks for any reason feel threatened by bitcoin, they could easily crush it. Just buy it up like crazy…drive a real bubble on purpose, then crash it. Who knows, maybe that’s what’s happening now.

buy point

nevertheless, the technical buy point is where it is, and it’s worth a try, if it gets there. You’re risking a move of 10% against you, for potentially many multiples if it really is going to get big.

The fact that India sort of legitimized it, is a check in the bull column

July 16 update

The crypto crash has continued since I originally sent the technical analysis just a few days back. Bitcoin dipped below $1900 last night. It’s lost over a third of it’s value, very fast.

The pace of the pop and flop leads me to suspect that these will not hold up. Bitcoin may bounce at $1250 as I suggested, but it might only get back to about $2100 or less, then fail again.

Crypto-currency-stocks

The most intriguing thing about the new ICOs (Initial coin offerings) is using them in lieu of stocks to raise money for early stage companies.

It seems to me that could become something important (or not.) I don’t have a strong opinion, but it’s interesting.

Bitcoin as an asset

Another thought that made me go, hm:

When people buy Bitcoin, it’s as if a new asset was created in the world. When someone digs up some gold, or builds a new house, there is literally more valuable stuff in the world. It’s not just that the stuff that already exists is getting more valuable (inflation.) It’s hard to unbuild a house, or rebury gold.

But when people buy up bitcoin (or a stock) they are saying that actual new value is being added. If it’s not, then it’s speculation that someday there will be actual new value. If that speculation comes to be seen as wrong, that seeming extra value in the world can vanish much quicker than you can unbuild houses or rebury gold.

At $3000 bitcoin was valued at around $40 billion. That’s not really enough to make a difference to world economies, if the value suddenly disappears. At $2000 bitcoins, we’ve lost maybe $12 billion in global assets. A drop in the bucket.

But, if bitcoin really had run up to $300k, so that all bitcoins were valued at $4trillion, then it’s closer to the size of the 2007 housing bubble. If that was a bubble that popped, it could move a needle.

]]>http://pneuma.com/2017/07/16/cryptoparabolas/feed/0Currency technicalshttp://pneuma.com/2017/06/30/currency-technicals/
http://pneuma.com/2017/06/30/currency-technicals/#respondFri, 30 Jun 2017 17:37:19 +0000http://pneuma.com/?p=1035This is a companion piece to my entry yesterday, titled $€? This piece talks about what I was seeing technically, in charts, in currencies. At the end, I make my future predictions, for the next 2-3 years. My MO My trading MO, so far, is, I try to understand what charts say about how the market […]

This piece talks about what I was seeing technically, in charts, in currencies.

At the end, I make my future predictions, for the next 2-3 years.

My MO

My trading MO, so far, is, I try to understand what charts say about how the market values things first, then secondarily, I try to understand how fundamentals support what I think I see.

What the hell?

Non trader friends often tell me they don’t understand what the hell I’m talking about. It’s frustrating, since almost all my friends are non-traders. And I am attempting to talk in very clear language, about things I think matter to all of us, traders or not.

And I only use a very few things in trading. I use pretty much no “indicators.” (No moving averages, RSI, Mac D, etc etc.)

Fibs

One of the main things I use is Fibonacci levels. And of those, there are only two that I usually use.

The most obvious one is 50%. That’s simply the middle of any range. And then, on a very large time frame, the 61.8% level becomes VERY strong.

So I talk about that level in these 20 year time frame charts. Anything over a few months, and the 61.8% level is the one to watch. On shorter time frames, the 50% level is stronger.

Mainly I feel like people think they don’t understand me, because they think I must be saying something more complicated than what I’m actually saying.

Anything is boring unless one is interested, unless we find a practical connection which engages the topic to our real lives.

An EEG readout is boring. But what it talks about is very important, and vitally interesting.

We are trying to use market charts like an EEG reading, to tell us about the brain activity of markets, which vitally affects us, and everyone.

Here is the Dollar range, which started in 2014

It popped out on Trump, then fell back in.

The way price reacts around ranges is the main thing I’ve learned about trading. Most of my ideas revolve around this, rather than obscure indicators.

When price moves out of a range, if it sticks to the edge, and makes a little hat like pattern (on the top…on the bottom, it would be a bowl like pattern, stuck to the underside of the range), it’s likely to plunge back in to the range, and retrace it.

If price breaks out of a range, and holds, beyond its edge, its impulsive. The market is saying the old range of value is no longer appropriate. And it’s trying to establish a new range. Like what happened in the stock indices on the Trump move.

The dollar looked like it was preparing to act the same, like this SP500 chart.

The fact that the chart looked like I describe technically, makes me think the market was reading the currency fundamentals and technicals the same way as me. The fundamentals I described in my $€? entry.

But we were wrong!

Technical reasoning.

There were other technical reasons for this thinking (that the dollar had further up to go, and the euro further down, before finding a turning point.

On a 20 year time frame, the Trump pop broke the very strong 61.8% level. This broke the 20 year old down move in the dollar, in my mind.

Looked at like this, very broadly, with monthly candles, it looks like that that 61.8% level held. And clearly, it did, messily.

But you see how that one monthly candle closed outside of the 61.8% level? And then the next month double topped there, before turning down? To me, that broke the level, and was meaningful on a very large time frame.

That was a “poor high.” Meaning, it doesn’t look like a final top. (Although it does look like the top I compared to the Cabo Rock formation.)

If you zoom in on that area, you can see how it got above that 61.8% level, and held there in space, for a very long minute. (Getting your time frames wrong is one of the best ways for technical traders to screw themselves up.)

This would have been a very painful short, for months. I did in fact short it, but that action confused me. Of course, this is a 20 year time frame. And when you zoom out enough, it did work. At this point, in retrospect, it was obviously little pain for a big reward.

Anyway, you can see how, after holding above for quite a while (grey circle), it plunged back in, through the important level, held for even longer than it stayed above (fuchsia circle). Tried to move up one last time (yellow circle). And then failed miserably.

And, remember, our 2014 range top was below the 61.8 level. And taken as a whole, over months, in a big picture, the action above the range DID stick to the edge, form the hat type pattern, and plunge back in.

On this scale, it does make a nice top. Nearly a picture perfect head and shoulders. Touch of the 61.8 level forms the first shoulder. Then the breakout/fail forms the head. Try one more time to get out, second shoulder. And that’s all she wrote.

I remember reading William O’Neil’s How to Trade Stocks. He said the “head and shoulders” pattern is rare. But on many time frames, I see it very frequently.

In retrospect, the good short was on the second shoulder, the second touch of the 61.8 level, which was the first two weeks of March 2017.

And even this was painful, since it was slightly higher than the first shoulder. Lots of large time frame fake outs in this action. Goldman Sachs scale traders fucking with each other.

The Euro

In the Euro Dollar pair, we had similar actions.

Here is the 2014 Euro range

Look how it broke out of the top earlier, and plunged back in. That’s a good high. “Secure high.” Look how it broke out of the bottom….POOR low.

Technically, it looks like it wants to go lower.

Is there some other reason to think it might go lower, other than the psychological parity target? A technical reason?

Why yes!

The whole 2014 range is a very sloppy break well below the 20 year 61.8% level.

But is it going lower? Obviously, no. Not yet.

As it went back up, look how it reacted around the 50% and the 61.8% levels. It considered the 50%, then blew through both!

Also, look at that gap, the white box. There is nothing like that in the whole 3 year range. That is highly likely to get filled later.

Future guesses

So after all, the whole point of technical chart reading is to guess the future, based on the historical values.

Ironically, my future guesses about the dollar action, from blogs quite a while back, were pretty accurate. But in real life, I got confused by the pivots.

In order to actually profit through trading or investing, we have to be able to make predictions, take positions based on our predictions, then read the action as it happens in real time, to decide if our prediction is acting correctly, and if we should hold, or get stopped out.

That last part is really the rub. It’s where psychology and experience become SO important for investors and traders.

Euro guess

This predicts a fall roughly from 2018-2020, with levels.

Sometime around then, we probably need to assess if the Euro zone will recover, of be scraped and rebuilt.

Here are some levels I will use to look for that turn around a few months from now, somewhere in the $1.17-$1.20 area.

It would be nice to see a spike from $1.17 to $1.21 and fail, back through $1.17 all in one day, or one week. That would be a good short.

$

Here’s how I’ll look for pivot levels in the dollar.

]]>http://pneuma.com/2017/06/30/currency-technicals/feed/0$ € ?http://pneuma.com/2017/06/29/dollar-euro/
http://pneuma.com/2017/06/29/dollar-euro/#respondThu, 29 Jun 2017 22:41:04 +0000http://pneuma.com/?p=1030Why has the dollar been falling, and the Euro climbing, through 2017 ? This is my stream of consciousness attempt to work out things about the economy I think are important. Things I have a hard time finding someone explaining using Google searches. I’m interested for investment purposes, and effect on peoples’ standards of living, […]

]]>Why has the dollar been falling, and the Euro climbing, through 2017 ?

This is my stream of consciousness attempt to work out things about the economy I think are important. Things I have a hard time finding someone explaining using Google searches.

I’m interested for investment purposes, and effect on peoples’ standards of living, and all the things currents in the economy effect.

Sometimes I get things wrong, but I don’t go back and correct them. I just proceed with my new and improved knowledge, to tackle the next topic, which again, may involve misconceptions or partial understandings.

I welcome anyone to correct me where I’m wrong.

I should go back and get more charts and references for things I mention, but I’m too lazy. So you’ll just have to read my mind. I’ll try to make it legible.

Some graphics

To me, these charts say the market thought Trump in office, meant good for business, meant the Fed raises rates, which contracts our money supply, relative to other currencies still being printed (eased…Euro, Yen, Yuan, etc).

Trump being pro-business leads to a strong economy, which leads to fed tightening, which means stronger dollar…makes sense, right?

Wrong! But why?

Why is the dollar going down and the Euro up in 2017?

And why is the dollar going down in general, when our Fed is tightening, while everyone else is still loosening?

When the Fed has long since stopped QE, and the ECB is still printing money, shouldn’t the US money supply be contracting, while the Euros expand?

I have Googled this question, and it’s surprisingly hard to find an answer. Search results are old, and mired in rudimentary talk about QE.

I have also asked the question in trader chats, and to random strangers. Crickets. Guesses? I guess all I can do is guess.

Fed So and So

A related question that also arose, is in the recent Fed Head speeches, one of the main ones, not Yellen, but, anyway, he said, even though the Fed had started to raise rates, the economy is perplexingly still “easing.” What did he mean? And that therefore, the Fed can accelerate towards further rate raises, and also unbalancing (unwinding, deleveraging, reducing) their $4.5 trillion balance book.

This is also hard to Google. Again, you get the gatekeepers talking about QE and whatnot, again. But I persisted. And found this article that helped my guess a little better.

The current in currency

Originally, I had simplistically thought that printing money, the way the Fed did it, just injected money into our economic veins, which increased the money supply, and therefore leads to inflation (more money = less value per bit of money.)

And this is true, in the sense that, if the government takes a loan, and the Fed creates the money to give it to them, and the government spends it, it does enter circulation.

But there are also other reasons this action has economic repressions.

I had also thought, surely also the frequency of transactions matters. If you had a smaller amount of money, but it changed hands more, you’d get more GDP, and more earning, and quicker producing, and so on, right?

At first I never saw discussion about this. But eventually, I did find it popping up in things I read, like the article I just linked. So it is a thing. An economic indicator on central banker dashboards.

This adds a little more nuance to my understanding of how their actions reprecuss. I still believe they are telegraphing to the world loud and clear, that they are going to drive down prices of stocks and bonds, by “unwinding” their balance sheet.

But I want to more clearly understand the mechanism. And also why the dollar and euro are not behaving the way I had expected.

The big idea

So their idea is, they lower the base loan rate. But normally banks still charge positive interest on loans, or they won’t make a profit. They add something to it, a premium.

And if you wanted to sell bonds, and you were the government, or IBM, you’d want to offer the least interest possible, get the best rate possible, when you borrow.

So in addition to lowering the floor on how low bonds and loans can be priced, the Fed comes in and buys up shitloads of bonds at near zero or zero or subzero or whatever.

The bond market is an open market, a free market. But normally, no one would buy a zero interest rate bond, let alone a negative rate bond. So there are no free market takers for these new bonds.

There are two things the free market can do, in order to invest. Either buy bonds issued in the past, which had more interest (which drives up the prices for old bonds, and bond futures prices), or put their money somewhere else. Much of that money went in to stocks, and gold, and stuff.

I remember one of the things that dismayed central bankers, was that a lot of that money, that they scared out of “safe” investments, like bonds, just sat there, stagnant. It lost all velocity, currency, it just laid there, dead cash.

Why, btw, are bonds considered “safe?”

Because you don’t expect the US government, or a state or city government, or IBM, or the EU, to go out of business. Which, come to think of it, is a little scary, since the EU does seem like it could go out of business.

Scary yield-less zombie bonds

Anyway, the idea of the central bankers was, that by scaring money out of bonds, people would spend it. Some did. But a lot bought stocks or gold, and then again, it just sat there, until the next guy bought their stocks, or gold, if the first guy ever sold.

Frequency/quantity

In order to create earnings, and raise GDP, money has to change hands. If a smaller amount of money changes hands more times, it creates the same effect as if there is more money supply moving more slowly.

I’ve seen charts that show how the frequency of transactions has fallen since the 1970, when the curve of “financialization” started. You’ll just have to imagine them, or remember them, or look them up yourself.

Debt>currency

In the 70s it took $2 of new debt to create every $1 of GDP growth. That means, half if it was being squirreled away, “invested.” Now it takes $6 of new debt to create $1 changing hands. The other $5 are in the stock market, and gold, old bonds, and so on.

This is how the rich get richer, parabolically, while the trend is flat for most people, or slightly up, depending on each strata lower you go, in the top % of earners.

If all the money created through debt flowed the economy as currency, then the economy would increase as the same speed as the money supply. Whatever part of the money supply is not circulating is “invested.” So investments, things that hold value, generally grow at a rate exponentially larger than the economy itself.

So there ideally would also be a measure of: if the quantity of transactions, and the speed of transactions, took place as a few big transactions, or lots of little ones. Lots of little ones would be like an early stage in life. A few big ponderous ones, probably later. At least, that has been the trend over time.

Why then €up$down?

Does this tell us what is happening in the Euro Zone and the US right now, to make the Euro go up, and the dollar go down?

When Fed speaker so and so, said that the US economy is surprisingly continuing to “ease,” even though the Fed had started to raise rates, and telegraph more future “tightening,” it doesn’t necessarily mean that people and businesses are taking more loans, creating more money, and therefore transactions. It can also be more transactions with the already existing money.

And in fact, for 2017, the % of new commercial and industrial loans being taken has been crashing towards zero. Which is normally a bearish sign for the economy, leading towards recession. So it’s probably the other thing, the economy speeding up, “heating up.” Imagine the chart.

One thing that seems to have caused this, is the pro-business rhetoric, image and hopes pinned to Trump.

As a person with a business, catering to businesses, we can attest that business has picked up. There are more transactions.

Therefore, more transactions, does indeed lead to the effect of an increasing money supply, hence, a weaker dollar (“inflation”). Don’t worry, the Fed will put a stop to that!

Meanwhile, in Europe…

Having not heard Draghi’s comments, we can only guess that what is happening in Europe is something very different. Even though the EU is STILL printing money, as fast as the US Fed ever printed it, the Euro zone is not increasing transaction speed, circulation, as fast as the US…or otherwise getting the money they are printing in to some form of transaction, GDP.

And the Euro zone has gone in to the heretofore never heard of extreme life support tactic of negative rates! So when they are borrowing this money in to existence, they are forcing bondholders (themselves…obviously not the free market in its right mind) to pay for the privilege to hold the bond.

And the EU DOES buy corporate bond. So it’s like IBM says, I want to borrow $1billion. How much interest do I have to pay you if you loan it to me. The ECB is like, dude, we’ll loan you $1billion, and pay you 1% per year, as long as you hold it!

So, IBM says, cool. Borrows the $1billion. And what do they do with it? We’ll, possibly nothing. They are already earning 1% on it (still a flabbergaster.) And of course, if they do nothing, no transactions take place, there is no current in the currency. It’s more like a swamp of money.

But they could also do something else, like buy stock. Hey, how about their own, we (IBM) pays 1.5% dividends, or whatever. This “buyback” reduces stock on the open market, raising the stock price, raising the bottom line of IBM, and raising their profits; but again, creating no current in the money supply.

They can also buy other things, like stocks of other companies, ETFs, whatever. There are lots of things they can buy to make money with money, but not produce products, paychecks, transactions.

So this, process, again, grows the stock market, but not the economy. Therefore, the EURO zone, while printing money, has the net effect of less new earnings and GDP (inflation) than the US, even while printing money. It’s the same as less total money supply, if you took time (transactions, frequency) out of the equation.

This means the Euro zone economy sucks!

What next?

Now that we think we understand the seemingly weird play in the dollar and euro values for 2017, using the same new guesses about how this all works, what should we surmise will happen when the Fed starts to “unwind” their balance book?

Deleveraging means that, when bonds expire, that they bought from the government, or mortgage backed bonds, they are not going to renew the loan.

Since the government always runs a deficit, it needs to not only renew its old bonds (at current interest rates), but sell more of them. And we hope there is always a net deficit of mortgages too, since we want more of the private sector to be taking loans to buy houses.

In order to get real free market participants (you, me, China, IBM, whoever) to buy these bonds, the government and Fanny Mae will have to offer them with some interest, some reward.

At first, the Fed will unload $6 billion per month of bonds on to the free market, which they intend to increase quarterly, until they are either unloading $80 billion bonds per month, or disaster hits, or looks immanent.

The more they unload, the more buyers they need to attract, so the higher the interest rates will have to be on new bonds.

So what this would cause would be slowly raising interest rates, making old bonds less valuable. New bond buyers start to buy actual new bonds. They sell their old bonds, or stocks, to buy new bonds. And therefore the bond and stock market both go down.

If you had a geostrata type chart of the amount of bonds floating around at zero % interest, then .25%, .5 % and so on, you’d have a granular view of the pace at which money would flow out of old bonds, and in to new ones, as new ones hit each successive layer. But that would just be one measure.

Amounts of stocks and bonds

At what point do people start selling stocks, or gold, or whatever, and start buying new treasury bonds instead? And in what way, and when, does this affect “the economy,” which is that above equation, quantity of money x velocity of money, which translates in to GDP, which can be broken down in to types of transactions, big and small, and their effect on various businesses, and their earnings reports.

It might behoove us to remember that the bond market is many times the size of the stock market. So when bond money was scarred out of bonds by Fed buying, there was a lot of it. The bond market is about 4x the size of the stock market. So money flowing in or out of the bond market might have outsized effects on the stock market.

One thing we can surmise is that stock prices falling will lead to lower earnings reports from companies, since the big ones used the aforementioned scheme (borrowing and investing money) to add to their bottom lines. I think this figure is actually listed in Finviz. The financial earnings of the company, or something.

We also have the wild card of the Swiss National Bank, and the ECB and so on, who did something our Fed (presumably) did not, which was acting like a hedge fund, and using their “balance book” to buy stocks. It’s probably not wild, once we dig through it. But it’s a side topic.

So, seemingly, the Fed reducing their balance book, should result in a decline in the stock and bond markets. An orderly one, or so they hope.

How does orderly become less so?

If hedge funds, mutual funds, giant holders of stocks, believe that the stock market will fall, they begin to unwind large positions. It’s the same as an uptrend in reverse. The large entities “distributing” their stocks on to the market have to do this in tranches.

Their positions are so large, they cannot acquire nor unload them all at once. So prices tend to move in big lurches, when the whale are feeding, or, whatever is the opposite of that.

This is all natural, and ok, as long as it’s orderly. Make your way to the exits, in an orderly fashion, please.

But there is the idea that the stock market leads the economy normally, be 6 to 9 months. Why would that be? If the stock market went down, why would the economy follow?

Well, one thought that comes to mind, particularly in an increasing “financialized” corporate world, is that some big corporations will become less profitable, simply because the stock market is going down, and part of their profit comes from stocks they own.

They are not necessarily changing what they produce, or the economy. But when they earn less, they produce less GDP, and they might shed some jobs. Meanwhile, automation might combine with that trend. Some of the lost jobs don’t become new jobs. Some people default on loans. Sell their stocks and to get by. The defaulted loans shrink the money supply, etc. There are lots of factors, like with any complex system, involved with deflation, of whatever asset.

Their story

The story of the Fed is that when they stopped printing money, and the stock market flattened out, and the economy didn’t crash, and then after a couple of years, even surged forward, showed that the heart paddles of QE worked. And the patient was fit as a fiddle again.

To the extent that this is true, in theory, they’d be able let the free market take up the slack that they created with cheap, free money. This will cause the stock and bond markets to fall, but in theory would not make the economy falter.

I think that has not historically been the case, and is not likely. But that’s another topic requiring more digging. And when we do that further digging, we should probably think through the “yield curve,” the ratio of interest yield on bonds, depending on their expiration.

Typically, the yield curve inverting has been a precursor to a recession. This means when the short term bonds, like 1 or five years, starts paying more interest than longer dated bonds, that’s a bad sign.

Why? Another topic for further thought. I’m sure it’s secrets will reveal themselves under sufficient scrutiny.

Since I’ve been watching markets, I’ve noticed that central bank actions have been broadly explicit, and predictive of giant market moves. So it could be well worth trying to decipher their actions and market implications.

(For instance, everyone knew the Fed was going to print shitloads of money, starting in 2009. And predictably, the stock market ballooned. Everyone knew they were going to stop printing money in 2014, and predictably, the dollar shot up, and oil crashed.)

A few days ago, I wrote in shock about discovering that central banks were buying up equities, and had bought $1.7 trillion of equities in the first half of 2017.

Part of the reason why I was shocked, was that I thought central banks didn’t do that, that it was against the rules (which they write.)

After poking around a little, I’ve realized that this is indeed against the charter of the US Fed. The Fed has a $4.5 trillion “balance book.” Of that, about $3.5 trillion was created since the 2008 crash, by the Fed “buying” US treasuries, and crappy mortgage backed securities.

This “balance book” is the thing they would be using to buy stocks and corporate bonds, if they were doing that. However, we don’t know what they are doing, since they “refuse” to be audited.

But the public language of the Fed is that they intend to “unwind” that balance book. If so, surely it’s not heavily invested in stocks, since that action would crash the stock market.

Let’s get back to some guesswork about that “unwinding.”

Who bought $1.7 trillion of stocks?

The buyers I’ve found are mainly the European Central banks (ECB), the Bank of Japan (BOJ), the Swiss National Bank (SNB), the Central bank of South Africa, and maybe a few other minor league central banks. Apparently none of them have that annoying “charter” like the US Fed, forbidding this kind of meddling in free markets.

And of course the Chinese Central bank famously meddles in its free markets, but I don’t have any info about their holdings or purchases. I’m assuming they are not part of the $1.7 trillion in purchases in 2017. Unless that figure accounts also for the Chinese central bank buying Chinese stocks. Come to think of it, probably it does.

The BOJ bought exclusively Japanese stocks. The balance of ownership in the Nikkei is interesting. Almost ALL buying of Japanese ETFs since 2008 has been the central bank. Other ownership has remained nearly flat.

The SNB is an odd duck. I never thought about it before. But that is the one that was easiest to find an accounting of exactly what they bought. For instance, their biggest purchase was $800 million of Apple stock in Q1 of 2017.

And they have been accumulating Apple stock for years. They own around $2 billion of Apple stock. Weird, but still only a small % of Apple. Less than 2%.

Unwinding the Fed balance book

The Fed has said it wants to reduce it’s balance book from about $4.5 trillion down to anywhere from $3 trillion down to $1.5 trillion.

The idea is that, from 2009 to 2014 they printed $3.5 trillion by buying government bonds, and mortgage backed securities, as a stop gap measure to prop up the economy.

As the housing meltdown caused $ trillions in disappearing money, because mortgages defaulted, the Fed stepped in and replaced that money by buying up debt themselves…in order to keep the money supply constant, or slightly growing.

The story line is that this is an emergency measure. If the economy was healthy, private businesses and individuals, and other governments, would take on this debt to grow with the economy.

So when the economy recovers, and starts growing again, the Fed would not hold these vast assets of their “balance book.” They would let private business and people and other governments take up the slack. Because they are the good guys, right? They aren’t planning to buy up and own everything, supposedly.

When the US Fed say they are going to “unwind the balance book,” they are presenting themselves as a paragon of propriety, in a world seemingly run amok with profligate central banks, who are spending their balance books buying stocks, and so presumably don’t intend to “unwind,” (unless they are saying the same thing, that they’ll inflate stock prices, then wait for the public to pay up to buy them back at a higher price or later date.)

The Fed has said that it will start by reducing it’s balance book, probably in December of 2017, by about $6 billion per month. They will ramp up quarterly, until they are reducing by $60 billion per month. Obviously unless something goes wrong.

So my understanding is that, as bonds come due for renewal, when they say that they are not intending to rebuy the government debt, or mortgage back securities, they are expecting the public to buy them instead, or other governments.

That is the reason they are raising rates. Because if rates are zero, no one in their right mind would buy these bonds, in a normal market. (Although for years there have been buyers, even when they have to pay to hold the bonds.) So this is all a posture of normalcy. Or predicting or planning for normalcy.

However, we know that one of the “policies” central banks have followed lately, is to make the economy get better by forward “guidance.” Which means, they will just say it will get better, and therefore it will.

Anyway, assuming the whole story is on the up and up (and this all starts, conveniently, right before Yellin’s term ends), this means they need the economy to be able to absorb an extra $6 billion per month, ramping up to $60 billion per month, on top of the economic activity it’s currently supporting, just to stay even.

When Yellin confirmed all this in the press briefing Wednesday (June 14) , after raising rates to 1% as anticipated, the markets sold off, rightly anticipating this Fed policy would likely lead to a contracting money supply, falling stocks, stronger dollar, weaker economy, etc.

Shortly after that, the market mostly recovered, because this isn’t happening now exactly. The tiny rate hike isn’t particularly significant. But when the balance book “unwinding” starts, if it starts, there is a high probability of bear markets in stocks and bonds.

Who is going to buy this debt?

My understanding of China’s US treasury debt buying, is that it reflects our trade deficit. When Chinese companies make profit by selling to the US, they turn these dollars in to their central bank. The central bank exchanges the dollars for yen, then uses the dollars to buy US treasuries.

If this is correct, it seems to me, we would need to increase our trade deficit, to get China to absorb extra US Treasuries. This of course supposes that China doesn’t have an economic crisis.

If rate hikes lead to a stronger dollar, then that would normally decrease our exports, so slowing GDP, but increase our imports, strengthening China’s GDP. So maybe this strategy will work. China would buy more of our debt…but will the US economy have enough oomph to maintain its momentum with less exports?

The elephant in the room is probably the EU. Of the big three, the EU seems most poised to implode. Possible triggers and scenarios in Europe deserve more attention elsewhere.

Conspiracy theories

What I’ve written and understood so far is a combination of stuff I’ve read and rationale and guesses. Because, in spite of the new leaf in central bank transparency since Bernake, although the broad strokes are described, the mechanics and details are harder to come by.

I am certainly a central bank conspiracy theorist. It seems to me that, if central bankers control the world’s money (which they do), and the rise and fall of most secular enterprises, personal fortunes, large businesses, political access, and so on, it would be foolish to imagine that they don’t conspire.

There are probably back room meetings between the central bankers buying stocks, and the US central bankers, who ostensibly don’t do this. They probably have plans that they are not sharing with the public.

Whether that means they might be completely misleading the public, and they have no intention to “unwind their balance book” or not, I don’t know. But I would guess that really is their intentions. In general, they have announced to the public their large moves.

I think it’s important to try to understand consensus reality, before diving in to conspiracy theories. And good to keep in mind that while central banking conspiracies almost surely happen, it doesn’t mean that most theories are correct. In fact, if most conspiracy theories were correct, the conspiracies would not be very successful.

So the takeaway is to plan for economic slowing or contraction, that would start at the point when the Fed announces the “unwinding” has begun.

If that announcement happens, and causes a market downturn, it may not get bought back up as quickly as we’ve come to expect since 2009.